Good afternoon, and welcome to Mechel Reports First Quarter 2011 Financial Results Call. My name is Emma, and I will be your coordinator for today’s conference. For the duration of the call, you will be on listen-only. And at the end of the call, you’ll have the opportunity to ask questions. [Operator Instructions]

I am now handing over to Vladislav Zlenko, Director of IR to begin. Please go ahead, sir.

Vladislav Zlenko – Director, Investor Relations

Thank you, and good day, everyone. I would like to welcome you to Mechel’s conference call to discuss our first quarter 2011 results which were reported today.

After management has made their formal remarks, we will take your questions to the presentation team. Please note that during this call, management will make forward-looking statements, some of which may have been made in the press release. Some of the information on this conference call may contain projections or other forward-looking statements regarding future events or the future financial performance of Mechel as defined in the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

We wish to caution you that these statements are only predictions, and that actual events or results may differ materially. We do not intend to update these statements. We refer you to the documents Mechel files from time-to-time with the United States Securities and Exchange Commission, which contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

In addition, we will be using non-GAAP financial measures, including EBITDA in our discussion today. Reconciliations of non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures are contained in the earnings press release, which is available on our website at mechel.com.

At this point, I would like to turn the call over to Mr. Yevgeny Mikhel. Mr. Mikhel, please go ahead.

Yevgeny Mikhel – Chief Executive Officer

Good afternoon to some and good morning to others ladies and gentlemen. I had to welcome you at this conference call for company performance in the first quarter 2011. I will start today’s presentation with general remarks about our performance and reports period. And then I will pass the floor to our CFO, Stanislav Ploschenko to walk into our financial results.

Results of our performance in the first quarter are the ones that I would characterize as successful. Although, Yakutugol one of key coal mining assets of Mechel temporarily lost its wash plant due to an accident. We were able to demonstrate fairly stable performance in the Mining segment quarter-on-quarter. The steelmaking, ferroalloy, and energy segments also performed fairly well.

As a result, across the first quarter of 2011, our results are as follows. The consolidated earnings of OAO Mechel is close to US$2.9 billion, EBITDA US$567 million, net profit is US$309 million.

In the reporting periods, the Mechel mining segment was primarily focused on rebuilding the wash plant in Yakutugol as fast as possible. After in the end of 2010 several electric furnaces were destroyed. We address this challenge and we addressed this successfully and really fast. By mid February two out of three production lines in the wash plant were already in place and running. Currently all the repairs have been successfully finalized and the wash plant is working at full capacity.

We were also focused on moving forward on one of the key projects for the mining segment, the development of the Elga coal deposit. Here we are exactly on target with our action plan and our expectation is to get the first coal from Elga by the end of summer.

In addition to our current projects in Yakutia, these are Yakutugol and Elga. We are continuing the development of this unique region, uniquely rich in mineral resources within the framework of our strategy for the entire group. For example, very recently we bought a license to develop the Pionerskoye, the iron ore deposit, which is located as close as 127 kilometers from Yakutugol and is also very close to the Trans-Siberian Railroad.

The proximity of the deposit to the existing transport infrastructure and to the existing coal mining operation will allow us to cut cost for the development of the Pionerskoye and put it in commercial operation faster than a usual deposit would do. The good positioning of the deposit in relation to the main off-takers in Russia and in neighboring countries makes this deposit even more attractive to us.

In the steelmaking segment, we are pushing forward with our ambitious program for the modernization and retrofit to cut cost and to make more value added products and generally products of higher quality. For example, earlier this month, Otelu Rosu one of Mechel’s steelmaking plants located in Romania started to run a modernized steelmaking complex. The unique arc furnace technology that is used in this complex will allow us to dramatically cut the raw materials and energy expenditure per kilo of end product and also it will allow us to increase the quality of the finished product.

(indiscernible) some of our plants is to put into operation mill 250 in Izhstal. This step will be the last step in the retrofit of the steelmaking part in this plant and it will also finalize the modernization of the steel rolling capacity in this plant. We started this process in the middle of last year when we put into operation the electric complex, an arc furnace and a continuous caster.

Anyhow, in the first quarter we were able to keep the positive impetus which we gained in the previous year and we were also able to prepare ourselves to ride on the back of possible market trends in the rest of the year. Considering, the market situation in our main markets and with our main off-takers, we are now ready and intend to continue our efforts to increase our efficiency across the holding company to utilize as effectively as possible all the advantages of vertical integration and continuously pushing through with our strategic investment products. We are ready to grow our company further and add shareholder value.

And now, I’d to pass over to Stanislav Ploschenko to drill down into our financial performance across the segments. Thank you.

Stanislav Ploschenko – Chief Financial Officer

Good afternoon and good morning ladies and gentlemen. All in all the results of the first quarter were satisfactory in our opinion, but we have witnessed a different price dynamics in different markets with generally positive trends which compensate for a usually slow quarter. Diversifications across different industrial segments and geographical markets also contributed to the positive results and helped to maintain the level of stability achieved earlier.

We will begin this time the overview of the results with the mining segment. The segment’s results in the first quarter were affected by an accident at the washing plant at Yakutugol in the end of December which was idle for half of the reported period and only partially loaded in the second half. That led to a decrease in Yakutugol’s coking concentrate sales volumes to the third parties by 49% quarter-on-quarter. That was partly compensated by sales volumes growth in Southern Kuzbass up 8% and Bluestone up 10%.

The result in coking concentrate third party sales volumes fell by 21% quarter-on-quarter, all in the account of exports. As the washing plant was working below the capacity, part of the mining equipment was redeployed to increase the output of steam coal, where third-party sales volumes increased by 26%. The sales of PCI and anthracite slightly decreased by 4% quarter-on-quarter due to seasonal equipment maintenance. Iron ore third-party sales grew by 11% as more concentrate was sold to China at the expense of intergroup sales.

Coke sales remained virtually unchanged. The declined sales of the Yakutugol’s hard coking coal resulted in a decrease of Asian share in sales from 32% to 35% first quarter, whereas the (indiscernible).

The price environment as you know was positive with PCI and anthracite average realized price up 9% to $122 a ton. Iron ore concentrate up 29% quarter-on-quarter to $103. Coke up 8% to $343 a ton all on FCA basis.

The coking concentrate price increased only by 6% to $167 a ton FCA as all the sales on the export market were done in fulfillment of quarterly contracts signed in the fourth quarter of 2010 and export sales declined on the account of Yakutugol. The new prices for coking coal were captured fully only in the second quarter, where volumes also recovered. The realized price for steam coal sell 16% quarter-on-quarter to $59 a ton FCA due to the fact that all the additional coal mines at Yakutugol were sold to the local grid and utilities, where prices are generally lower than on export markets thus pushing the average price down.

The result was 7% quarter-on-quarter decrease in the third-party sales to $828 million. That was partly compensated by 23% growth in intergroup sales mostly on the account of high coke sales to the Steel segment and doubling of sales with steam coal to the Power segment. Overall, revenue remains virtually unchanged.

The cash cost of production grows in the first quarter. However, most of this rise is explained by the seasonal factors and ruble appreciation against the reporting currency. The seasonal factors were high cost of winter fuel as first quarter is generally colder than the fourth one. Maintenance is also usually performed in the fourth and first quarters.

Other factors were increased electricity tariffs in Russia, both different growth rates reaching 22% proportion of mining plant as well as social tax, which was changed from 26% to 34% at regressive rate which means that the higher portion of the tax is levied in the first quarter decreasing thereafter throughout the year. The salary rise was in line with inflation. In Southern Kuzbass, the cash cost went up to $39 a ton due to all the above mentioned factors plus additional expenses associated with the new phase preparation in Lenin Mine, which was launched in the second quarter.

The combination of the factors described above plus reduced production pushing the fixed cost up led to temporary growth in Yakutugol cash cost of $33 a ton and half of that growth is explained by the rise in ruble against dollar.

The cash cost at Bluestone rose by 10%, at least one-third of the rise came from royalty payments and sales tax, which are directly related to the sales price and thus tend to grow in the raising market. The rest came from higher fuel prices resulting from the overall growth in oil prices as well as scheduled maintenance of the mining equipment at surface mines.

All these factors led to a 16% growth in the cost of sales. It is notable that amortization increased by 50% as new leased mining equipment was commissioned during the first quarter. Most of that equipment was deployed at Elga. The growth in cost of sales with flat revenue resulted in a 14% decrease in gross profit, which posted $536 million or 49% of the revenue.

Selling and distribution expenses fell by 30% to reflect lower exports from Yakutugol due to reparation of the washing plant. Administrative expenses grew by 45% mostly due to the described above change in the social tax. The $18 million write-down in bad debt provision, which happened in the fourth quarter was absent in the reported period that all resulted in a 13% fall in SG&A expenses and a 13% decrease in EBITDA, which posted $361 million or 33% of the segment’s revenue.

The net interest expense fell by 11% as more debt was attributed to the Steel segment. The profit tax grew by 65% to $86 million mostly on the account of Southern Kuzbass, Yakutugol, and (indiscernible). Most of this increase is explained by a reduction of the deferred tax asset by $20 million as profitability of the business continued to grow. The appreciating ruble resulted in the $155 million FX gain versus $10 million loss in the previous quarter. That resulted in a net income of $291 million or 31% quarter-on-quarter increase.

Now, we will move to Steel segment. Despite the fact that the first quarter traditionally is low season in Russia marked with restocking in preparation to the summer construction season, the segment demonstrated a superior performance partly offsetting lower results of the mining business. The combination of growth in high value-added production and ongoing expansion of distribution resulted in third-party sales volumes growth across almost the entire product range.

Sales volumes of low alloyed engineering steel grew by 32% quarter-on-quarter, flat steel by 19%, rebar by 4%. Most of the increase in engineering steel sales came from own operations at Chelyabinsk, Izhstal, and Targoviste as the modernization program continued to show result. However, it is also notable that more and more qualitative shift in our sales comes from the growing distribution. Most of the third-party sales increase in flat steel and also in engineering steel came from resale operations of third-party product. Overall, revenue generated through resale of complementary third-party sale products exceeded 30% of the segment’s third-party sales in the reported period.

The growing strength of Mechel Service Global European operations also have to benefit from the geographical diversification effect by accelerating sales in Europe, when the Russian construction market wasn’t at seasonal lows and stock built up.

In the first quarter, share of Russian sales fell to 49% of total versus 55% a quarter ago, whereas European sales grew from 20% to 24% over the third-party revenue. The price environment in steel was also favorable in the first quarter. All of the seasonal price fluctuations showed more dynamics in this period with a big rise in the first half and an equally sharp correction in the second one. The strength of our distribution platform helped to level this things out, which resulted in higher average realized price than in the previous quarter, while the resulting in the ore dimension stock increase. Semis were up 9%, rebar, wire and stampings all up between 11% and 13% quarter-on-quarter, flat products up 5% on average.

The combination of price and volumes growth resulted in 12% price in revenue from third-parties for the previous quarter to almost $1.8 billion. And the segment revenue also increased by 15% to $89 million.

Despite the growth in cash costs on the back of increasing coking coal, iron ore, gas, and electricity prices as well as ruble appreciation, which accounts for at least a quarter of the cost inflation in the reported period. That inflation was generally in line with the revenue growth. In order to analyze the dynamics in the gross and operating results, one need to take into account the reclassification of some $50 million of intergroup transportation expenses for the third and fourth quarters of 2010 from selling and distribution expenses to cost of sales, which happened in the fourth quarter 2010.

Since that was a one-off effect that led to the inflation of cost of sales and a respective reduction in the SG&A expenses in the fourth quarter. That resulted in an apparent 39% quarter-on-quarter increase on gross profit in rise of gross margin to 19.5% of the revenue versus 15.7% in the previous quarter. Below the gross results that factor also resulted in a twofold growth in selling and distribution expenses quarter-on-quarter. If that factor is tripped off, the gross profit will show a lower yet still positive increase of 17% with gross margin only slightly up. The selling and distribution expenses in fact grew only by 22% respect in higher sales in Europe.

The increase in other taxes to $19 million came mostly on the account of higher property tax as new equipment was commissioned and provisions for tax liability. That however was fully offset by lower administrative expenses, which fell from 5% to 4% of the revenue quarter-on-quarter. The resulting EBITDA grew 13% quarter-on-quarter to $150 million, the EBITDA margin ticked slightly up to 8.11%.

Net interest expenses increased to $68 million due to overall growth in net debt and chipped off part of the total credit portfolio from Mining to Steel segment. Due to the same factor, FX item posted $14 million loss in the reported period as the segment took on the more ruble denominated loans, which exceeded in value of the loans and assets in depreciating foreign currency.

The income tax expense slightly increased to $19.7 million, mostly the growth in net interest payable led to the 52% decrease in net income which posted $15 million in the reported period.

For the financial performance in the ferroalloys in the first quarter 2011 was driven by combination of rising prices and sales volumes. The average realized price rose quarter-on-quarter by 16% for nickel, 4% for ferrosilicon, whereas for ferrochrome it remained virtually unchanged. At the same time, the volumes of ferronickel sold to third parties fell by 29% due to the fact that the sales terms in respect of certain volumes were not fulfilled resulting in a carryover balance of nickel into the second quarter, similar to the situation we had in the third and fourth quarter of 2010.

The volumes of third-party chrome sales grew by 21% as the ramp up of the chromite production at Voskhod mine continued. The third-party sales of ferrosilicon grew by 17%. We managed to react quickly to more favorable price environment on the domestic markets, where averaged realized price grew 4% quarter-on-quarter versus export prices. Consequently, the share of domestic sales in the segment’s revenue grew from 25% to 27% quarter-on-quarter, whereas the combination of lesser ferrosilicon and nickel export, due to the factor mentioned above, caused the reduction in Europe share to 51% of the segment’s revenue in the first quarter.

The combination of growing prices, volumes of ferrosilicon and chrome and a carryover balance of unsold nickel resulted in flat quarter-on-quarter third quarter sales dynamics of $124 million. As the cash cost rose due to ruble appreciation and inflation of electricity prices, which you can see on the slide number nine, the gross profit decreased by 20% to $31 million or 17% of the segment’s revenue versus 22% in the fourth quarter of 2010.

The operating expenses rose 16% quarter-on-quarter to $19 million due to rise in administrative expenses which came from the increased social tax for the Russian companies. The EBITDA decreased by 12% to $35 million or 20% of the segment’s revenue versus 23% in the fourth quarter. The net interest expense of $22 million remained virtually unchanged. The income tax posted $0.7 million which can be compared to $62 million tax loss in the fourth quarter resulting from the change in the Kazak property tax legislation. The fixed item posted $12 million income versus $1 million loss in the previous quarter. This resulted in a negligible $2 million net loss in the first quarter versus $66 million loss in the previous one.

The Power segment demonstrated superior growth in revenue and profitability in the first quarter which along with the fourth quarter is traditionally strong in demand and sales. For the increase in electricity tariffs that happened in the beginning of the year, also contributed to the economics of the segment. That helped to offset to some extent the negative effect of that increase on the cost of sales in other segments. This demonstrates the benefits of diversification to power generation in the environment of growing electricity prices.

The positive effect of the diversification was augmented by growing integration of the Power segment into the economics of the other segments. The share of intergroup sales in total revenue of the segment grew to almost 40% in the first quarter versus 36% in the previous one. That happened despite full consolidation of the Toplofikatsia Rousse which added $10 million of third party sales to the top line in the first quarter.

Thus the revenue from third parties grew by 21% in the reported period to $225 million. The gross profit rose by 37% to $110 million or 30% of the segment’s revenue. The selling and distribution expenses grew by 14% to $73 million reflecting higher electricity transportation tariffs. The bad debt provision increased by $3.4 million versus $4.3 million write-down in the fourth quarter which is natural for the local electricity market where receivables are accumulated throughout the year and redeemed in the last quarter.

Consequently, the EBITDA of the segment grew by 65% to $35 million or almost 10% of the revenue, the highest in the segment’s history. Net interest expense grew by 7% to $5 million. The property tax grew by 77% to $4.6 million as the profitability of Mechel Energo increased dramatically.

Nevertheless, the segment posted $20 million of net income versus only $8 million in the previous quarter, the second biggest contributor to the first quarter bottom line after the Mining segment in the consolidated picture. On the consolidated basis, the group’s top line grew by 6% to $2.9 billion quarter-on-quarter, the gross profit increasing significantly to $1.21 billion or 35% of the revenue.

Operating expenses rose by 13% to $573 million, where the decrease in selling and distribution expenses in the Mining segment due to lower exports from Yakutugol was compensated by growing sales force on some steel and power segments. The combination of net gross income and higher operating expenses led to 7% quarter-on-quarter decrease in the consolidated EBITDA to $567 million, or 19% of the revenue, slightly below their previous quarter profitability.

Net interest income grew by 16% to $136 million, as the growth in credit portfolio outpaced the continuous reduction in the debt service rates. The FX item posted to $153 million gain as ruble appreciated against dollar and euro versus a $15 million loss in the fourth quarter 2010.

Income tax expense fell by 19% to $111 million, as the one-off $60 million tax write-up in the Ferroalloy segment, which was posted in the fourth quarter 2010 due to change in Kazakh income tax rates. The result was 59% quarter-on-quarter growth in the bottom line, which posted $309 million of net income.

The first quarter showed negative operating cash flow of $347 million, which is explained by several factors. Firstly, the low construction season in Russia usually leads to an inventory buildup during the first quarter, when most of the restocking take place at metal traders, in our case represented by Mechel Service.

Secondly, during big price swings ending up with negative trend in the second half of the reported period, MSG was accumulating more stock in order to level out the price volatility. This strategy fully paid off as we can see now in the second quarter as local steel prices revised with the beginning of the construction season and MSG began to reduce the stock at the more favorable price level.

Thirdly, MSG continued its expansion to new European markets, which is usually connected with local increasing inventory and receivables in order to guarantee stable supplies in an unknown market and win new customers. We have witnessed this picture in Czech Republic, Italy and the United Kingdom.

And last, the cash flow from our mining operations was affected in the first quarter by lower export sales and high stock of raw coal at Yakutugol due to the accident at the washing plant. All in all, we invested around $700 million in the working capital in the first quarter versus $349 million in the previous one. Along with $365 million of investments, almost all of it, in new plant and equipment does required extra $520 million of financing. This was an affordable amount as our profitability grew and we were looking to a more dynamic second quarter.

Even with that additional debt, our backward looking net debt-to-EBITDA ratio reduced further to 3.4 times and EBITDA interest coverage remains above four times in the first quarter, as you can see on the slide number 14. Moreover, all of them knew the raised debt was long-term, we were also able to replace some short-term debt with long-term in the first quarter, which improved the maturity profile of our portfolio with long-term debt reaching 70%. This trend continue into the second quarter as we recently placed 15 billion rubles with five-year unsecured bonds at 8.4% coupon setting a new benchmark for ruble denominated long-term debt for our company.

With continuous improvement of the maturity profile, notable reduction of interest rates and increasing profitability of the business which is much the function of the wise-targeted investment and the working capital. We are becoming more comfortable with our financial leverage. Nevertheless, despite these positive factors, we continue our commitment to further deleveraging in order to see more room for investments in the future.

To recap, the first quarter results were satisfactory and less predictable. The first three months are always marked as a preparatory stage for a breakthrough in the rest of the year and it is extremely important to make right preparations and right decisions and create an effective launching pad for the business to achieve superior results and use the market situation most efficiently.

As the developments in our core market demonstrate, the improvement in the financial strengths of the group and the investments made during the reported period allowed us to capture the markets fully in the second and the third quarters.

Let me thank you ladies and gentlemen for your attention and patience, and we are ready to take your questions.

Vladislav Zlenko – Director, Investor Relations

Thank you. We will now take questions. We would ask that participants please state their name and company before asking the question and allow sometime after for translation. When questions are answered in Russian, they will be followed by translation. So, you may ask your question in Russian also and we will translate for you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Now, first question is coming from the line of Dmitry Smolin, UralSib Capital. Please go ahead.

Dmitry Smolin – UralSib Capital

Dmitry Smolin, UralSib Capital has asked three questions. Question one, what are your production plans for Elga for the rest of this year and for the next year? Have any changes been made to the original production plan? And what can you say about the construction of the railway from the existing railway to the Elga department?

Question two, considering your current situation with your net debt, what are the covenants that you have on the net debt to EBITDA ratio for this year and for the years down the road?

Question three, Mechel Mining announced an additional issue of shares which amounted 32% of new shares. So, you will get the money and where are you going to spend it, maybe you are going to buy Raspadskaya or to make an IPO?

Vladislav Zlenko

The first question will be answered by Vice-President for Business-Planning and Analyses, Oleg Korzhov.

Oleg Korzhov

I understand that at every conference call people tend to ask a lot of questions about Elga, so with your permission ladies and gentlemen, I would like to expand on Elga right away. Indeed, our plan for Elga includes three main stages. Number one, the construction of the railroad, number two, the construction of the coal production complex, number three, the construction of infrastructure.

Our plan for the rest of August is to build the railway to the 209 kilometer. As of today, we have built 162 kilometers of the railway. Bridges, the construction of bridges is a separate and very big issue in this particular project. Overall, we have 77 bridges in our original plan, 39 bridges have been built to-date. Until the end of the year, we are thinking about building another 29 bridges and another 9 bridges will be built in the year 2012. And we will have the bypasses for all the bridges that will be built in 2012 in the end of year. Overall, with the railway construction, we are exactly on target against our original plan.

Operator

Ladies and gentlemen, please remain connected. We are going to connect speakers’ line shortly. Thank you. Please hold the line for the conference host to join the conference or the customer services representative.

Ladies and gentlemen, thank you for your continued patience. Please remain connected while the speakers’ line is getting reconnected. Thank you. Please hold the line for the conference host to join the conference or the customer services representative.

Ladies and gentlemen, thank you for your continued patience. Please remain connected. Please hold the line for the conference host to join the conference or the customer services representative.

Ladies and gentlemen, thank you for your patience. Speakers’ line has been reconnected. Please continue with the question. Dmitry Smolin is on line. Please continue. Hello, please continue with your presentation.

Oleg Korzhov

We are continuing our presentation. The first part of the second part of the question about the coal production complex, the plan is to get the first run-of-mine from Elga in August. Currently, we are busy with getting the production permit for Elga. Starting from August, we will transport the coal by truck to kilometer 209 and our plan is to produce 300,000 tons of coal by end of year.

Infrastructure, we have finished the tender for the construction of the staff accommodation settlement at Elga. The tender was won by Posco. And according to the contract, the space will be for 3,000 people. We will start the gradual construction of this settlement and will put it in place stage after stage with full capacity running in mid 2013.

We have also finished the tender and are in the process of signing the contract for the construction of the seasonal wash plant with the capacity of 1 million tons of coal per year. The construction will start in the end of this year and will end in accordance with the intended contract in May 2013.

We are currently in the tender process to construct the main wash plant of the deposit. We plan to finish the tender in the end of the summer, start the construction of the wash plant in the second or third quarter year 2012 and finish construction in the end of year 2013. The first stage – the full capacity of the first stage of the main wash plant will be from 9 million to 10 million tons of coal per year.

And the last infrastructure project I would like to highlight is the electric power for the deposit. Here, we are also exactly on target and our plan is to start the permanent powering of the deposit in the beginning of 2013. Also I think part of the question was about the – our plans for the production from Elga in 2012. Here we are not changing our original plan, which is 2 million tons of coal throughout 2012.

Vladislav Zlenko

Second and third questions will be answered by Mechel’s CFO, Stanislav Ploschenko.

Stanislav Ploschenko

The second question was about our covenant on net debt to EBITDA ratio. Our current covenant which is in our credit contracts is three to one by the end of the first half 2011. One day – two days, but technically one day prior to the end of the first half. Looking at our sales and looking at the market situation, we are confident that we would be within the covenant.

The third question was about the additional share issue. The General Shareholder Meeting of Mechel Mining indeed has made a decision to increase the number of announced shares, but it does not amount to any increase in the chartered capital of the company. The objective of this move is to create additional financial capacity for Mechel Mining and it may be spent to add some assets to Mechel Mining or it maybe our spend to consider an IPO, but we are not yet in a position to talk about the certain objectives because we don’t still know we are not yet decided 100% about which projects would be more effective and more attractive than others.

Vladislav Zlenko

We are ready for the next question, please?

Operator

Thank you. The next question is coming from the line of Sergei Donskoi, Troika. Please go ahead.

Vladislav Zlenko

The first question will be answered by Mr. Stanislav Ploschenko.

Sergei Donskoi – Troika

Please allow sometime for translation of the questions please. Sergei Donskoi, Troika asked four questions. The first question was to comment on the decision of the General Shareholder Meeting to buy Dalewave Limited. The question relates to the recent speculations in the media that probably by buying this company Mechel wants to approach the buying of the Donetsk steelmaking plant. So, would you please comment on which assets are within the perimeter of the company you have bought and when do you intend to close down the deal?

The second question is could you give any production guidance for the rest of this year for the coal that you produce at South Kuzbass, Yakutugol, and Bluestone? The third question is could you give the CapEx guidance for the rest of 2011? And the fourth question was a very short question, what is the price of the coal that you sell from Bluestone? Thank you.

Stanislav Ploschenko

On the first question, yes, the purchase of Dalewave Limited is indeed the purchase of the Donetsk steelmaking plant, which is owned by Dalewave Limited. The price of purchase is $537 million. However, our company is going to pay for this enterprise in several installments until the end of 2014. This transaction had to be approved by the General Shareholders Meeting, because it involved a guarantee from OAO Mechel and therefore was classified as a linked transaction and it required the approval by the majority of non-interested which is minority shareholders which was done. Thank you.

Vladislav Zlenko

And the next question will be answered by Mr. Oleg Korzhov.

Oleg Korzhov

Oleg Korzhov will take the remaining three questions. Not sure about the order of importance, the first question we take is the question on CapEx guidance. We are not changing our original guidance, which we gave a little earlier $2.3 billion. The plan has not changed. We have contracts that cover the entire amount and we have agreements with suppliers which also cover it. And we are confident that all contracts that we currently have will be successfully finalized.

After the Bluestone comprises, we need to point out that in the first quarter the call from Bluestone was sold according to the contracts signed in the end of 2010. The price range was $220 to $230 per ton will be United States.

We have a follow-up question from the line of Dimitry Smolin. Please go ahead. Dimitry please go ahead with your question. There is no answer. We have a follow-up question from the line of Sergei Donskoi. Please go ahead.

Sergei Donskoi – Troika

Two follow-up questions from Sergei Donskoi. First of all, seeking clarification on Dalewave Limited purchased by Mechel, did Mechel accept any legacy debt either from the Donetsk steelmaking plant or from Dalewave itself? And the second question, what is the cost of chrome ore?

Vladislav Zlenko

The questions will be answered by Mr. Stanislav Ploschenko.

Stanislav Ploschenko

On the first question, Mechel accepts $16 million of debt, which are passes over from the Donetsk steelmaking plant. This is the only debt Mechel accepts as the result of the deal. And the cash cost of chrome ore at Voskhod in the first quarter was $230 per ton.

Vladislav Zlenko

We are ready for the next question, please.

Operator

Thank you. The next question is coming from the line of (indiscernible) Asset Management. Please go ahead.

Unidentified Analyst

Ladies and gentlemen, we are seeking clarification on the second question about thermal coal. Could you please restate your second question?

Translation of the three questions has obtained. Number one, your inventories are grew by $400 million, could you please answer why? Number two, looking at your presentation I can see that the price of thermal coal in the first quarter 2011 was down. It was down to $59 per ton against $77.0 per ton in the fourth quarter in 2010. Could you please explain why? And the third question is the follow-up question about the production guidance. Could you give separate production guidances for thermal and coking coals? Thank you.

Vladislav Zlenko

The questions will be answered by Mr. Oleg Korzhov.

Oleg Korzhov

The question on thermal coal. It is true that in the first quarter of 2011, the weighted average price of thermal coal across the company was lower than in the previous quarter. This was because we sold more thermal coal on the internal market and the volumes of thermal coal were higher, which is due to the accident at the wash plant in Nerungri. As we know, the prices on internal market are generally lower than the export prices and therefore the weighted average price, which we listed in the presentation, is indeed lower than in the previous quarter.

Vladislav Zlenko

The first question will be answered by Mr. Stanislav Ploschenko.

Stanislav Ploschenko

The question about the mineral inventories, the apparent increase in mineral inventories is purely monetary because this is explained by ruble appreciation against the dollar. Since the terms of the license are nominated in rubles, the mineral inventories are also nominated in rubles and therefore in dollars they appeared to be higher than before.

Vladislav Zlenko

The third question will be answered by Oleg Korzhov.

Oleg Korzhov

The production guidance for coking coal and thermal coal, I will give you our expectation until the end of year, we have not yet changed our original plans. So, this is what we expect to have produced by the end of the year. Coking coal concentrate overall 14.5 million tons, South Kuzbass 5.9, Yakutugol 5.6, Bluestone 3. Thermal coals overall 7.8 million tons, South Kuzbass 3.3, Yakutugol 4, Bluestone 0.5.

In addition to that, our expectation is by the end of year to have produced and sold 1.5 million tons of anthracites and 2.5 million tons of PCI.

Vladislav Zlenko

We are now ready for the next question, please.

Operator

Thank you. The next question is coming from the line of (indiscernible). Please go ahead.

Unidentified Analyst

Two questions are coming from Mr. (indiscernible). First question, on looking, thank you for the presentation, and I’m looking at the cost of the raw materials in Mining segment, they are up quarter-on-quarter. I understand that this maybe partly explained by seasonality and my question is, should we expect the repetition of what happened in the beginning of year 2010, when in the second quarter the cost were down quarter-on-quarter by 10% to 15% or in this year, is your expectation that it will be offset by continuing ruble appreciation.

The second question, could you please give the current prices for the coking coal, if you have any contracts for the third quarter. I’m particularly interested in Yakutugol export prices?

Vladislav Zlenko

The first question will be answered by Mr. Stanislav Ploschenko.

Stanislav Ploschenko

Response to the first question, you have rightly noted that the cost structure is in mining industry is in indeed seasonal. Usually cost higher in Q4 and Q1 then in quarters two and three. And starting from the beginning of the second quarter, we are indeed expecting some decrease in the cost. Of course there will be one factor that will work against this trend this is the change in the change ruble to dollar exchange rate.

We have seen with hindsight so that in the second quarter the ruble has appreciated against the dollar somewhat and this of course has decreased the favorable development in terms of cost. But this factor was not able to offset the seasonal decrease in cost and therefore the situation with cost is still rather good better than in the first quarter.

Vladislav Zlenko

The second question will be answered by Mr. Oleg Korzhov.

Oleg Korzhov

On the contract basis for our coking coal concentrate we can talk confidently only about the coal that we sell on a quarter-by-quarter basis. For Yakutugol, the contracts that we have for K-9 grade are within the range between $300 and $310 per ton. The spot prices and the prices on the Russian market in the second quarter, our expectation and hope is that they would be the same as in the second quarter. $300 to $310 this were the prices at Port Posiet.

Vladislav Zlenko

We are now ready for the next question, please.

Operator

Thank you. The next question is coming from the line of Dmitry (indiscernible) from Raiffeisen Bank.

Unidentified Analyst

Two questions from Dimitry (indiscernible) if we heard the name correctly. The first question is about the Yakutugol incident, do you expect or have you already experienced any government action that resulted from that incident? The second question is about the reserves at Donetsk. Could you disclose any reserves right now and can you say how it will impact the overall reserve base of the company?

Vladislav Zlenko

The question will be answered by Mr. Oleg Korzhov.

Oleg Korzhov

Respond to the first question, after the government action that resulted from the incident in the wash plant at Yakutugol, we can not see any risks that come together, where there is government action. The reasons for the accident, the process of addressing the accident and the process of putting the wash plant back in to operation were closely overseen by the Russian Technical Authority, Rostekhnadzor and the plant will work again at full capacity as soon as we get back all the necessary permits from Rostekhnadzor.

Vladislav Zlenko

The second question will also taken by Mr. Oleg Korzhov.

Oleg Korzhov

Donetsk reserves is at January 1, 2010 iron ore in place was 137 million tons, the prospective reserves plus 750 million tons. So, this is what we are currently putting in to our expectations and plans.

Vladislav Zlenko

Next question, please.

Operator

Thank you. The next question is coming from the line of Yuriy Vlasov from JPMorgan. Please go ahead.

Yuriy Vlasov

Second questions came from Yuriy Vlasov. Question one, it is in fact a follow-up on the topic of the Pionerskoye. Could you please say, what are the production volumes? Did you expect from this deposit? What is the possible schedule of production? How close the deposit is to the existing infrastructure and what CapEx do you expect for this deposit. The second question is volumes, physical volumes of inter-segment or intra-group sales in the Mining segment?

Vladislav Zlenko

Oleg Korzhov will answer the questions.

Oleg Korzhov

Respond to first question, Pionerskoye deposit is located in the Neryungri district of Yakutia. It is 127 kilometers from the town of Neryungri and it is as close as 25 kilometers to the nearest railway and the nearest road for trucks. Our plans for the development are as follows. Right now we are in the process of completing the field development and our expectation is that it will take us another six to eight months to have a good quality document. After that it will take the government, we expect three months to review the document and only when we get it back and only when it is finalized and fully approved we will be in a position to talk about any specific figures in terms of production and in terms of CapEx. Until then we would be cautious to take this issue where there is specific figures.

Vladislav Zlenko

The second question will also be answered by Oleg Korzhov.

Oleg Korzhov

The response to the question about intergroup sales volumes, we are answering with figures from the first quarter. In the first quarter of 2011 the overall production of thermal coal was 2.1 million tons and 0.5 million went to the Mechel Mining enterprises. The coking coal concentrate, the respective figures are 2.7 million tons and 0.7 million tons. Here we are primarily talking about the Mechel Mining coking chemistry enterprises. And iron ore concentrate the respective figures are 1.5 million tons overall production and 0.5 million tons intergroup sales.

Operator

Thank you. The next question comes from the line of George Buzhenitsa from Deutsche Bank. Please go ahead.

George Buzhenitsa – Deutsche Bank

Three questions coming from George Buzhenitsa. Question one, what was the average steel price in the second quarter compared to the first quarter? The steel made by the company. The second question is about the distribution. What are the physical volumes of resales of products taken from third parties in 2010 and what is your expectation for 2011? And the third question is related to the second question, again it is about the distribution segment. Considering the current development of the segment, what do you think it will mean for your working capital? Should we expect the stabilization of the working capital if you push on with your plans developing the distribution or should we expect the further increase in the working capital until the end of 2011?

Vladislav Zlenko

The first question will be answered by Oleg Korzhov.

Oleg Korzhov

Response to the question one, I would like the prices for the two products that we think are key for our company and most indicative of the whole pricing environment. Number one, rebar, in the first quarter, the Russian prices were 25,000 to 26,000 rubles per ton PCI warehouse. In the second quarter, the price corrected a little bit to 24,000 to 25,000 rubles per ton. The second product is billet. Here I need to highlight that we almost saw no billet to third parties, but still the price of billet is one of the basic pricing indicators.

The FOB Black Sea price in the first quarter was in the range of $620 and $640 and in the second quarter it increased slightly to $630 to $650. As to the sheet rolls and other products, the prices for those products in the second quarter were not materially changing against the first quarter.

Vladislav Zlenko

The next question will be answered by Stanislav Ploschenko.

Stanislav Ploschenko

Responses to the second and third questions. The second question, in 2010 we refilled 2.5 million tons of third party products and in the first quarter of this year we refilled 870,000 tons of third party products. As further down the road, as Mechel Service grows and develops, we will refill more third party products because this will be needed to create the pools of products for our customers. We see that as a normal development for any of steel sales business. As to the possible impact of the development of distribution segment on the working capital, we can say that the investments in MSG will continue, but it will be incorrect to project the results of the first quarter onto the entire year. First of all because of the seasonality factor which I have already mentioned and secondly, if you look at the overall situation with operating cash flow, you will see that it was unfavorable primarily because of the incident with wash plant at Yakutugol. If we strip off the negative impact of that incident, you will see that the overall situation with operating cash flow would be much better.

Also when you look at the working capital, I think it is important to look not just at its volume, but at its quality. As Mechel Service developed its position on the Russian market, now the total turnover of the inventory is 60 days which for steel distribution business is a very good indicator, we think. And it has been going down for the past six weeks which, I think, demonstrates that the incremental volumes that were accumulated in the first quarter when the construction market is Russia was due to the seasonality factor not growing very rapidly. This inventory is allowing us to enjoy currently the results of what we did in the first quarter by selling out this inventory really quickly.

As to the accounts receivables, yes, accounts receivables by $200 million, but at the same time accounts receivables which are currently in technical default increased only by $10 million and this is also important to note. Thank you.

Vladislav Zlenko

Next question, please.

Operator

Thank you. The next question comes from the line of Dimitry Smolin, Uralsib Capital. Please go ahead.

Dimitry Smolin – Uralsib Capital

Another two follow-up questions coming from Mr. Smolin. Question one, I have done certain calculations on your covenant which as far as I understand by the end of the first half 2011 should be less than three in terms of net debt to EBITDA ratio. If you net debt is unchanged by the end of quarter, your EBITDA should be $940 million which is plus 65% quarter-on-quarter. I would call this mildly ambitious target. So, how do you expect to stay within the covenant by increasing EBITDA or by decreasing the net debt, and since you have taken this question, could you please also disclose the penalties and other sanctions for the breaking the covenant in case of course this happens.

The second question is about the immediate speculation that has been in the media today. One news agency says that Mechel Mining is going to sell up to 25% of its shares by autumn, another says that Mechel is only distribution the mandates to investment banks to organize the Mechel IPO later this year. Could you please prove or disprove this information?

Vladislav Zlenko

Stanislav Ploschenko will answer the questions.

Stanislav Ploschenko

Response to the first followup question. As to our financial performance in the second quarter due to which we expect to stay within the covenant, I can say that first of all in the second quarter we put the Neryunrginskaya wash plant back into operation. After the incident it also started to produce more coal because before the incident it had worked at less than 100% capacity because there was no need to run it at full capacity. But, right now we do run it at full capacity and in the second quarter we broke the record for the quarterly coal production. Also I’m talking about the coking coal concentrate sold from Yakutugol. Also we need to take note of the fact that part of the coal that was produced….

Operator

Please continue the presentation as speaker’s voice is now reconnected.

Stanislav Ploschenko

Also we need to take note of the fact that most of the coking coal concentrate which was physically produced in the first quarter was sold only in the second quarter after the wash plant was put back into operation. And therefore the sales of coal in the second quarter also include part of the coal that was produced, but not sold in the first quarter.

Also, we see that the steel market currently looks very good with the Russian construction industry increasing its pace of development and this is why the inventories are going down as does the turnover. And so there are two directions to staying within the covenant belt, increasing EBITDA and decreasing the net debt. It would also be useful to be aware of the fact that we are talking about net debt rather than total debt. Also the ferroalloys market looks reasonably good, and again we have the situation in which part of the nickel produced in the first quarter was registered as sold only in the second quarter because of the failure to transfer the title to the consumer in the first quarter. This happens sometimes with metals like nickel.

Vladislav Zlenko

The next question will also be answered by Stanislav Ploschenko.

Stanislav Ploschenko

Response to the second question, in response to one of the earlier questions, I already said that we do not have any definite plans as to what to do with the shares that would be additionally issued in accordance with the decision of the General Shareholder Meeting. These are announced shares and the aim of the additional issue is to increase Mechel Mining flexibility in attractive capital whenever and if any future attractive products turn up.

We are interested in attracting the capital of any kind and therefore we are in close contact with a lot of banks, constantly talking to them and discussing plans for attracting capital including through public transactions. However, we must definitely say that we have not yet given any mandate to any bank whatsoever.

Vladislav Zlenko

Next question, please.

Operator

We have no further questions coming through. I’ll hand you back to your host to wrap up today’s call.

Vladislav Zlenko

Ladies and gentlemen, thank you for taking the time to join Mechel financial results conference call today. The replay of the call will be available for the next 30 days. If you have any further questions, please contact the IR office. Thank you again from all the team here.

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